Social Security Cut Advances In Brazil

January 21, 1999|By Laurie Goering, Tribune Staff Writer.

RIO DE JANEIRO — Heading off immediate fears of a new currency plunge, Brazil's congress Wednesday approved a controversial cut in social security benefits, a measure considered a key indicator of the country's willingness to stick with a tough IMF-backed austerity package.

The bill, which also boosts social security contributions by workers, passed by a 352 to 143 margin and is expected to close Brazil's $16 billion a year social security shortfall by about $2.6 billion.

The vote had taken on huge symbolic importance in recent days and was expected to bolster investor confidence in Brazil and perhaps stem a continuing hemorrhage of cash out of the country.

The bill now moves to the government-dominated Senate, where it is expected to win easy approval. The measure earlier had been rejected four times by Brazil's lower house, including a defeat in December that initially spooked investors and helped launch the current panic.

"People feel the smell of crisis in the air," said Raul Velloso, a private economic analyst in Brasilia. "Now let's hope this smell goes on for a while so we don't relax and start thinking everything's OK."

Wednesday's vote was the second bit of good news for President Fernando Henrique Cardoso's government this week. Tuesday night the Senate approved a $9.6 billion tax on financial transactions, another controversial measure that still faces two votes in the often resistant Chamber of Deputies.

The two measures are part of an IMF-approved austerity package intended to cut Brazil's gaping budget shortfall--now around 8.2 percent of gross domestic product, or $65 billion--by $18 billion this year. Approval of the bills is key to Brazil continuing to receive payments from a $41.5 billion IMF bailout approved late last year.

Wednesday's vote on social security reform was expected to buy Brazil time in its effort to stabilize its currency, the real, which has lost around 24 percent of its value since a planned 8 percent devaluation last week raced out of control.

The crisis has led to fears of a Russian-style economic collapse by the world's eighth-largest economy, a disaster that could spread devaluations and recession to much of Latin America and perhaps eventually to the United States.

Capital flight out of Brazil continued Wednesday, but it was running at a third of the $1 billion-a-day levels of last week. The real remained mostly stable, closing at 1.58 to the dollar.

U.S. Federal Reserve Chairman Alan Greenspan predicted Wednesday that approval of the social security measure in Brazil would bolster investor confidence and "limit the potential for contagion to . . . Brazil's important trading partners, including the United States."

About 20 percent of U.S. exports go each year to Latin America, which has become a particularly important trading partner since the collapse of Asian and Russian markets.

The social security changes approved Wednesday will reduce the paychecks of about 300,000 Brazilian retirees, including the deputies who passed the measure.

The country's social security system currently takes in just one seventh of what it spends and is the largest contributor to Brazil's budget shortfall.